Microsoft Is Afraid of the Google Chromebook … With Good Reason

Chromebooks are hot sellers and MSFT is in panic mode

Microsoft (MSFT) has plenty of things to be worried about in 2014. It has a new CEO to pick, PC sales continue to be in the toilet, the Nokia (NOK) deal has to be finalized and its Windows 8.1 operating system still generates as many grumbles as kudos.

And as tablets continue to cannibalize PC sales, Google’s (GOOG) Android has pushed Apple (AAPL) iPads out of the leadership position. MSFT struggled with its first generation of Surface tablets, booking a $900 million write down on the Surface RT.

The second generation of Surface tablets appears to be doing better, but the field is even more competitive than last year and Android tablet dominance means price has now become another obstacle for the Surface to overcome.

With all of these challenges, why is Microsoft devoting so much energy on attacking Google Chromebooks? These cheap laptop replacements that run Google’s Chrome operating system and require an Internet connection to do much of anything hardly seem the equal of a PC notebook running Windows and Office.

Google Chromebook Is a Big Threat

In 2012, Google Chromebook sales barely registered. But they are a big threat today … and even if Chromebooks have been sneaking up on the public (it helps that they don’t look noticeably different from traditional laptops so you may not realize the person beside you in the coffee shop is using one), MSFT is well aware of their rapid gains this year.

You can see why Microsoft is worried. That explains the ramped up Google Chromebook attacks on MSFT’s Scroogled! website.

It’s plastered with vehemently anti-Chromebook quotes. Video of a pawnshop owner refusing to take a Chromebook is front and center, accompanied by the tag line “…it’s all about separating the real deal from the imitation.” Among the jabs Scroogled! makes: “Living with a Chromebook for a week is like 7 minutes of heaven, then 7 days of hell.”

And in case there’s someone out there who prefers Google’s Chrome web browser to Microsoft’s Internet Explorer, Scroogled! makes the point that’s no reason to switch: “There’s nothing you can do with a Chromebook that you can’t do with a Windows laptop running Chrome … So what’s the point of buying a Chromebook?”

When you compare this to the “I’m a Mac, I’m a PC” stuff that Apple used to run, APPL’s poking at Microsoft seems tame in comparison. But from Microsoft’s perspective, the battle against the Google Chromebook is a much bigger nightmare than any skirmishes with Apple over PC market share.

For one, Apple was dependent on hardware sales for revenue and priced its products with high profit margins. But Google is giving away its operating system and could care less about making money on any hardware it sells. While it’s OEMs would like to make a profit on hardware, with Google setting the bar low, Chrome’s modest CPU and storage requirements and no Windows License to pay, Chromebooks are dirt cheap.

Instead of pointing out that PCs are not only more popular but also cheaper than Macs, MSFT is now in the uncomfortable position of having to justify why consumers should be paying more for a Windows PC than a Google Chromebook.

And at the end of the day, even if Apple did sell a few more Macs and MacBooks, Microsoft could take consolation in the fact the owners might buy a copy of Office. With the Chromebook, there’s no such consolation prize. Every Google Chromebook bought takes a chunk of Windows sales revenue with it and means another copy of Office that won’t be sold.

Making the whole Google Chromebook threat even more nightmarish from the MSFT perspective is the lesson of what BYOD (bring your own device) did to BlackBerry (BBRY) in the enterprise market. The PC and Microsoft’s seemingly unassailable foothold in enterprise could be threatened by employees toting their own Chromebooks. Once the hardware is in the door, it’s hard to keep it out. And with the hardware will come pressure for enterprise to support the apps: Google Drive instead of Office. That means a threat to both Windows and Office in their core markets.

Microsoft can’t even necessarily count on its OEM partners to help out. The decision to enter the hardware business itself with the Surface tablets rubbed many PC manufacturers the wrong way. Hewlett-Packard (HPQ) — the biggest world’s biggest PC manufacturer — openly identified Microsoft as a competitor and is now offering three Chromebook models for sale.

Microsoft’s Scroogled! anti-Chromebook campaign makes sense in this context. Even if consumers and businesses don’t realize it yet, Chromebooks have quietly become top-sellers, putting Microsoft’s Windows and Office business in jeopardy. The risk Microsoft is taking in calling attention to Google Chromebooks — even if it’s to mock them — is that the Chromebook may be thrust into the spotlight, making things even worse.

So, yes, Chromebooks deserve to be in Microsoft’s 2014 list of things to worry about … and you can bet they’ll be near the top of the list for that new CEO.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.